In 2016 the EU Council committed to coordinated policy efforts in the fight against tax fraud, evasion and avoidance and adopted the "Conclusions on criteria and process leading to the establishment of the EU list of non-cooperative jurisdictions for tax purposes".
The Code of Conduct Group were then instructed by the EU Council to undertake a screening process whereby jurisdictions, including Guernsey, were assessed against three standards in respect of:
i) tax transparency,
ii) fair taxation, and
iii) compliance with anti-Base Erosion and Profit Shifting ("BEPS") measures.
No issues were raised in respect of Guernsey's standards of tax transparency and anti-BEPs compliance however, during the screening process the Code of Conduct Group expressed concern that Guernsey did not have a "legal substance requirement for entities doing business in or through the jurisdiction". The Code of Conduct Group were concerned that this "increases the risk that profits registered in a jurisdiction are not commensurate with economic activities and substantial economic presence".
These concerns were articulated in a letter to Guernsey, in November 2017, and in response Guernsey made a commitment to address these concerns by the end of December 2018.
As identical concerns were raised in Jersey and the Isle of Man, the Crown Dependencies have worked closely together to develop legislation to address the Code of Conduct Group's concerns. Representatives from the relevant industry sectors have also been involved to ensure the legislation can work in practice as well as meet the requirements of the EU.
The legislation will require companies tax resident in Guernsey, undertaking specific activities, to demonstrate that they have sufficient substance in Guernsey.
The Crown Dependencies have also prepared a document detailing key aspects of the proposed legislation and will continue to work together to produce comprehensive guidance notes.
If you have any comments on the Key Aspects document, please email email@example.com with the subject line "Guidance - Economic Substance.
- The legislation has been designed to address concerns that companies could be used to artificially attract profits that are not commensurate with economic activities and substantial economic presence in Guernsey.
- With this in mind the legislation requires certain companies to demonstrate they have substance in the Island by:
- being directed and managed;
- conducting Core Income Generating Activities ("CIGA"); and
- there being adequate people, premises and expenditure.
- These substance requirements apply to the following categories of geographically mobile financial and other service activities (the "relevant activities"), identified by the OECD's Forum on Harmful Tax Practices:
- Fund Management (this does not include companies that are Collective Investment Vehicles);
- Financing & leasing;
- Distribution and service centres;
- Holding Company (a pure equity holding company); and
- Intellectual Property (for which there are specific requirements in high-risk scenarios).
- All tax resident companies will be required to provide more information in their tax returns to ensure the above activities can be identified.
- Guernsey incorporated companies that have been granted exemption under paragraph 3 or 5 of Schedule 1 to the Income Tax (Exempt Bodies) (Guernsey) Ordinance, 1989 will also be subject to the substance requirements and therefore required to provide additional information if they carry on a relevant activity.
- Tax returns will also be tailored to collect the information needed to monitor compliance with the substance requirements.
- Collective investment schemes regulated by the Guernsey Financial Services Commission under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 are out of scope from these new legal substance requirements.
- The Crown Dependencies have prepared this more comprehensive guidance to supplement the key aspects document, which should be read in conjunction with the legislation. This guidance is being published jointly by Guernsey, Jersey and the Isle of Man now, to enable industry to engage and provide feedback, however is to be treated as a work in progress recognising that further technical aspects will develop through further discussions with the Organisation for Economic Co-operation and Development Forum on Harmful Tax Practices and the European Union Code of Conduct Group on Business Taxation.
- The tax administrations from the Crown Dependencies will continue to work together to further develop this guidance, which will be updated periodically, and will be complemented by Island specific guidance. The guidance is principles based and therefore cannot cover specific scenarios and will not replace the need to take independent professional advice.
- Guidance on aspects in relation to the economic substance requirements [488kb]
- Key Aspects in relation to economic substance requirements [337kb] version 2 - tracked
- Flowchart in relation to economic substance [454kb]
- The Income Tax (Substance Requirements) (Guernsey) (Amendment) Ordinance, 2018 was approved by the States of Deliberation on 28 November 2018 and provides the ability for the Policy & Resources Committee to make Regulations requiring companies carrying on, or undertaking, relevant activities to have substance in Guernsey.
- The detail of the substance requirement is contained in the Income Tax (Substance Requirements) (Implementation) Regulations, 2018, which were made by the Policy & Resources Committee on 13 December 2018, taking effect from 1 January 2019.
- The 2018 Regulations were amended by the Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2018, which were made by the Policy & Resources Committee on 19 December 2018, taking effect from 1 January 2019.
- The 2018 Regulations were further amended by the Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2019, which were made by the Policy & Resources Committee on 29 July 2019, taking effect from 1 August 2019.
- The Income Tax (Substance Requirements) (Guernsey) (Amendment) Ordinance 2018 [564kb]
- The Income Tax (Substance Requirements) (Implementation) Regulations, 2018 [15Mb]
- The Income Tax (Substance Requirements) (Implementation) (Amendment) Regulations, 2018 [264kb]
- Corporate residence [474kb]
- Proposed changes to economic substance regulations [510kb]
- 2019 Substance Implementation Amendment [7Mb]
- A public consultation was launched on 6th August regarding the proposals to which there were over 200 responses with 15 industry/professional bodies providing responses. The majority of respondents acknowledged the necessity of compliance with the Code of Conduct Group's requirements and following the global anti-BEPS agenda. They also generally viewed the burden of requirements as relatively low.
- A number of specific industry sector meetings have been held which, together with the feedback from that consultation, has informed drafting of the proposals, relevant legislation and will allow government to ensure a smooth transition for companies carrying on relevant activities.
Mandatory Disclosure Rules
- Guernsey has also given a commitment to introduce legislation for mandatory disclosure rules by 31 December 2019 (the timescale that EU Member States are working towards in order to implement an EU Directive which introduces rules that would be consistent) aligned to the OECD work on mandatory disclosure rules for the Common Reporting Standard ("CRS") Avoidance Arrangements and Opaque Offshore Structures.
- These rules would require promoters of avoidance arrangements and service providers to disclose information on the arrangement or structure to the Revenue Service. Such information would include the identity of any user or beneficial owner and would then be exchanged with the tax authorities, of the jurisdiction in which the users and/or beneficial owners are resident, where there is a relevant information exchange agreement.
- Whilst not currently one of the BEPS Minimum Standards, the rules effectively set out a "best practice" measure to assist in countering CRS avoidance, therefore, their introduction considered to be an inevitable part of the CRS compliance strategy for the Revenue Service.
- The letter from the Code of Conduct Group and the statement from the President of the Policy & Resources Committee dated November 2017
- The report prepared by the Code of Conduct Group and agreed by ECOFIN on 5 December 2017
- Annex 4 of the Scoping Paper endorsed by ECOFIN on 8 June 2018
- OECD Forum on Harmful Tax Practices 2017 report
- OECD Model Mandatory Disclosure Rules for CRS Avoidance Arrangements and Opaque Offshore Structures
- EU Directive 2018/822 on Mandatory Disclosure